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Stock returns and inflation: a new test of competing hypotheses

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  • Pierre Siklos
  • Ben Kwok

Abstract

In this paper, an unrestricted cointegrating VAR is employed to test the dynamic implications of three competing explanations of the negative stock return-inflation relationship. Test results are provided which make use of recent advances in testing for Granger-causality. One implication is that Granger-causality testing using the newly recommended procedures results in a different interpretation of the links between inflation and stock returns. It is also found that Geske and Roll's is the only theory with a dynamic structure that is not rejected by a sample of quarterly US data from 1960 to 1992, although results are not entirely inconsistent with Fama's proxy hypothesis. Only Benderly and Zwick's hypothesis is clearly rejected by the data. The results also provide stylized facts on the dynamics linkages among key macroeconomic variables.

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  • Pierre Siklos & Ben Kwok, 1999. "Stock returns and inflation: a new test of competing hypotheses," Applied Financial Economics, Taylor & Francis Journals, vol. 9(6), pages 567-581.
    • Handle: RePEc:taf:apfiec:v:9:y:1999:i:6:p:567-581
    DOI: 10.1080/096031099332023
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    3. Rapach, David E. & Wohar, Mark E. & Rangvid, Jesper, 2005. "Macro variables and international stock return predictability," International Journal of Forecasting, Elsevier, vol. 21(1), pages 137-166.
    4. Theophano Patra & Sunil Poshakwale, 2006. "Economic variables and stock market returns: evidence from the Athens stock exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 16(13), pages 993-1005.
    5. Nicolaas Groenewold, 2004. "Fundamental share prices and aggregate real output," Applied Financial Economics, Taylor & Francis Journals, vol. 14(9), pages 651-661.
    6. Somayeh Madadpour & Mohsen Asgari, 2019. "The puzzling relationship between stocks return and inflation: a review article," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 66(2), pages 115-145, June.
    7. Filis, George, 2010. "Macro economy, stock market and oil prices: Do meaningful relationships exist among their cyclical fluctuations?," Energy Economics, Elsevier, vol. 32(4), pages 877-886, July.
    8. George Filis & Ioannis Chatziantoniou, 2014. "Financial and monetary policy responses to oil price shocks: evidence from oil-importing and oil-exporting countries," Review of Quantitative Finance and Accounting, Springer, vol. 42(4), pages 709-729, May.
    9. Mathius Tandiontong, 2017. "The Influence of Financial Distress Using Altman Z-Score, The Beta of Stocks and Inflation To The Stock Return," GATR Journals jfbr126, Global Academy of Training and Research (GATR) Enterprise.
    10. Li, Xiyang & Chen, Xiaoyue & Li, Bin & Singh, Tarlok & Shi, Kan, 2022. "Predictability of stock market returns: New evidence from developed and developing countries," Global Finance Journal, Elsevier, vol. 54(C).

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